John Carney Is An Insane Idiot On Insider Trading

We got a lot of heat
today on our claim that the prosecution of Raj Rajaratnam
is a waste of time.

Readers seem convinced that somehow ordinary investors are being
hurt by insider trading. We just don't see it. So maybe you can
help us out. In the comments section below, we invite you to
propose ways that ordinary investors suffer actual losses because
of insider trading. We'll promote the best answers to their very
own post.

Keep in mind that we've already refuted quite a few of the
arguments people tend to make in favor of criminalizing insider
trading.

Buyers are hurt because insider trading buyers push up
prices. That's true but diversified investors are as
likely to be sellers as buyers in insider trades, so it ends up
breaking even.

Sellers are induced to sell too low because they don't
have the inside scoop. If anything, sellers are helped
by insiders willing to buy their shares at the price the sellers
are demanding. If the insiders are the only buyers at that price,
then the seller would have been forced to sell at a lower price
or hold a stock he wanted to sell.

Fewer investors will buy individual stocks if they are
worried about insider trading. Ordinary investors tend
to lose out when they try to pick stocks. They're actually
benefitting if they avoid stock picking in favor of broad
diversification and index funds.

Less money will come into stock markets if people are
worried about insider trading. This probably isn't true.
Insider trading leads to better pricing, which means that
investors can be more confident in prices rather than less.
Surprising quarterly results, for instance, will create less
volatility in a market where insiders have been trading the
stock.

Insider trading means that ordinary investors are
disadvantaged when it comes to the pros. Unfortunately,
this is the case regardless of insider trading regulations.
People who are professionally dealing with stocks will always
have a leg up on the investor who holds down a job and invests
his money on the side.

Insider trading damages transparency and trust in the
markets. Much of the trust that ordinary investors place
in the fairness and transparency of the markets is misplaced.
What's more, whatever costs may come from increased fears and
investor caution are likely to be made up for by increased market
efficiency.

I would never have sold if I'd known what the other guy
knew. So what? This is a claim that you are entitled to
all the information everyone else in the market has. But there's
no justification for this claim. The market exists, in part,
because different people have different kinds of information and
different opinions about what that information means.

Insiders cheat outsiders when they trade on non-public
information. Insiders almost never induce outsiders to
sell. In a liquid market for securities, sellers typically have
no contact with buyers. This means that they are selling without
regard to who is buying or what information the buyer might have.
No one is lying to anyone else because no one is explaining why
they are buying or selling a stock. It's not like selling a car
with a broken chasis and telling the buyer you just decided to
walk more often.

Insider trading permits someone to talk down a stock
while secretly buying it up in advance of good news.
This might be possible but it is very hard to execute. In the
first place, actual buying activity is more influential than
rumors. More importantly, this is just stock manipulation which
is illegal regardless of whether it is done through insider
trading.

Based on the furious comments on our earlier posts, however, we
assume some of you have much better arguments than the ones put
forth above. So go ahead, show us why we're idiots on this
subject.